ECONOMIC POLICIES, GROWTH AND STRUCTURAL CHANGE OF INDIA B. A. PRAKASH Chairman, Fifth State Finance Commission December 6, 2017
Objectives Examine the economic policies prior and after liberalisation Trends in growth of Indian economy Trends in structural change Trends in demographic change Demonetisation and economic growth Frame of analysis : relating economic policies to growth Data: latest data (Economic survey 2016-17, Vol I & II and CSO data)
Prior to Liberalisation (1947-1990) A centralized planning machinery for economic development and public investment decision-making Expansion of the public investment in the basic and key industries To intervene in the market through a number of regulatory measures and controls To achieve rapid economic development through State intervention in the market, public investment and planning
Contd.. A system of industrial licensing known as industrial raj System of import licensing Import substitution oriented and export promotion oriented strategies were followed The imposition of import controls, licensing and restrictions to restrict imports A fixed exchange rate regime was pursued.
Mixed Economy Framework The major characteristics were as follows A framework of private agriculture based on public investment support in key areas such as irrigation, research and extension The adoption of the logic of investment planning aimed at coordinating large scale investment in the so-called key sectors of the economy Assigning of a lead role to investment under the State auspices
Contd. A complex system of regulatory instruments aimed at conserving foreign exchange To prevent the growth of the so-called monopoly houses A deliberate policy of fostering small and medium industries to help diffuse ownership The use of State power to regulate the inflow of the private foreign capital The adoption of a regime of administered prices in the key sectors
Results of the Policy Excessive intervention in the market has distorted the market prices, interest rates, wages, foreign exchange rates, created incentives for entrepreneurs for rent seeking and corruption and prevented modernization and technological change The continuous deficits in BoP were financed through external borrowing resulting in huge foreign debt.
Contd. By 1991, the country was in the midst of an unprecedented BoP crisis Reserve Bank of India (RBI) was forced to ship 47 tones of gold to the Bank of England in July 1991 to raise a loan of $600 million
Structural Adjustment Reforms (SAR) Market oriented economic reforms (Freeing markets to determine prices) Stabilisation : correction in the balances in foreign payments, government budgets and money supply to reduce macro economic instability
Contd. Liberalisation : removal of government intervention of all kinds price controls quantity restrictions, investment and import licensing and barriers to entry Globalisation : reduction in customs tariffs, allowing free flow of foreign capital, opening up of service sector to foreign capital, full convertibility of Rupee etc.
SAR since 1991 Four major policy initiatives taken by the government were fiscal correction, trade policy reforms, industrial policy reforms and public sector reforms Fiscal policy was to restore fiscal discipline in the context of the acute BoP crisis and the persistent inflationary situation that prevailed due to large budgetary fiscal deficits.
Contd. Trade policy reforms was to create an environment that would provide a stimulus to exports, while at the same time reduce the degree of regulations and license control of foreign trade Industrial policy aimed to de-regulate industries so as to promote the growth of a more efficient and competitive industries Public sector reforms were to improve the operational efficiency and to implement a limited disinvestment of the public sector equity
Contd. Between 1991 and 1996 (Congress rule), major policy changes were implemented with respect to industry, international trade, external sector, infrastructure, fiscal front, financial sector and capital market In March 1993, India moved from the earlier dual exchange rate regime to a single, marketdetermined exchange rate system The second phase in which the economic reforms were expanded was the period of the BJP rule between 1998 and 2004
Results of the Reforms SAR since 1991 Indian economy moved from a low rate to high growth rate Achieved 6.5% to 7.6% growth rate except during Ninth Plan period Secondary sector began to register a higher growth rate Tertiary sector witnessed the highest growth. Some sub sectors achieved double digit growth in certain years
Contd Continuous decline in share of primary sector indicating a healthy change Share of secondary sector to GDP witnessed an increase Share of tertiary sector witnessed a highest increase The process of transformation to an industrial and service sector economy was accelerated
Contd.. Substantial increase in domestic savings and fixed capital formation Achieved a comfortable foreign exchange reserve Volatility in exchange rate has been reduced Indian Rupee become more stable.
Table 1 Growth of Net National Income of India (Annual Average Growth Rate) Plan Net national income (Constant prices) Percapita net national income (Constant prices) First Plan (1951-52 to 1955-56) 4.6 2.7 Second Plan (1956-57 to 1960-61) 4.1 2.1 Third Plan (1961-62 to 1965-66) 3.3 1.0 Three Annual Plans (1966-67 to 1968-69) 3.5 1.3 Fourth Plan (1969-70 to 1973-74) 3.0 0.7 Fifth Plan (1974-75 to 1978-79) 5.0 2.7 Annual Plan (1979-80) -5.9-8.2 Sixth Plan (1980-81 to 1984-85) 5.3 3.1 Seventh Plan (1985-86 to 1989-90) 5.8 3.6 Two Annual Plans (1990-91 to 1991-92) 2.8 0.8 Eight Plan (1992-93 to 1996-97) 6.5 4.4 Ninth Plan (1997-98 to 2001-02) 5.4 3.4 Tenth Plan (2002-03 to 2006-07) 7.6 5.9 Eleventh Plan (2007-08 to 2011-12)** 7.5 6.0 Twelfth Plan (2012-13 to 2016-17)*** 6.7 5.3 Source: Government of India (2017), Economic Survey 2016-17, Vol. II
Table 2 Annual Growth Rates of Real Gross Value Added at Factor Cost by Industry of Origin (Percent) At Constant Prices Year Agriculture, forestry & fishing, mining and quarrying Manufacturin g, construction, electricity, gas and water supply Trade, hotels, transport & communic ation Financing, insurance, real estate and business services Commun ity Social & personal services Gross value added at factor cost 2004-05 1.1 10.0 9.5 7.7 6.8 7.1 2005-06 4.6 10.7 12.0 12.6 7.1 9.5 2006-07 4.6 12.7 11.6 14.0 2.8 9.6 2007-08 5.5 10.3 10.9 12.0 6.9 9.3 2008-09 0.4 4.7 7.5 12.0 12.5 6.7 2009-10 1.5 9.5 10.4 9.7 11.7 8.6 2010-11 8.3 7.6 12.2 10.0 4.2 8.9 2011-12 4.4 8.5 4.3 11.3 4.9 6.7 Source: Government of India (2017), Economic Survey 2016-17, Vol. II
Table 3 Annual Growth Rates of Real Gross Value Added at Basic Prices by Industry of Origin (Percent) Year Agriculture, forestry & fishing, mining and quarrying Manufacturi ng, construction, electricity, gas and water supply At Constant Prices Trade, hotels, transport & communicatio n Financing, insurance, real estate and business services Communit y Social & personal services Gross value added at factor cost 2011-12 Series 2012-13 1.4 3.6 9.8 9.7 4.3 5.4 2013-14 4.8 4.2 6.5 11.2 3.8 6.1 2014-15 1.5 7.0 9.0 11.1 8.1 7.2 2015-16 2.2 8.6 10.5 10.8 6.9 7.9 2016-17 (PE) 4.4 6.0 7.8 5.7 11.3 6.6 Source: Government of India (2017), Economic Survey 2016-17, Vol. II Notes: PE : Provisional Estimates
Year Table 4 Structural Change of Indian Economy (Percent) Agriculture, forestry & fishing, mining and quarrying At Constant Prices Manufacturing, Trade, construction, hotels, electricity, gas transport & and water communicat supply ion Financing, insurance, real estate and business services Community Social & personal services Gross value added at factor cost 1950-51 55.03 14.71 11.28 8.55 10.43 100 1960-61 50.86 18.31 12.91 7.78 10.14 100 1970-71 44.51 21.74 14.49 7.52 11.74 100 1980-81 38.70 23.27 16.94 8.23 12.86 100 1990-91 33.10 24.22 17.69 11.55 13.44 100 2000-01 25.22 24.30 21.64 14.42 14.42 100 2010-11 16.84 25.67 27.33 17.27 12.89 100 2015-16 18.51 28.37 18.96 21.92 12.24 100 Source: Government of India (2017), Economic Survey 2016-17, Vol. II
Table 5 Gross Domestic Saving and Gross Capital Formation (As percent of GDP at current market prices) Year Gross domestic saving Gross fixed capital formation Househol d sector Private corporate sector Public sector Total Public sector Private sector 1950-51 6.5 0.9 2.1 9.5 2.5 6.8 9.3 Total 1960-61 6.8 1.6 3.2 11.6 6.8 6.0 12.8 1970-71 9.5 1.4 3.4 14.3 5.8 7.9 13.6 1980-81 12.1 1.6 4.1 17.8 9.1 8.8 17.9 1990-91 18.5 2.6 1.8 22.9 10.2 13.6 23.8 2000-01 21.3 3.7-1.3 23.7 6.7 16.0 22.7 2015-16 19.2 11.9 1.3 32.3 7.4 21.9 29.3 Source: Government of India (2017), Economic Survey 2016-17, Vol. II
Table 6 Foreign Exchange Reserves End of Fiscal Reserves Gold Reserve Tranche Position in IMF Special Drawing Rights Foreign Currency Assets Total 1980-81 370 --- 603 5850 6823 1989-90 487 --- 107 3368 3962 1990-91 3496 --- 102 2236 5834 2000-01 2725 --- 2 39554 42281 2010-11 22972 2947 4569 274330 304818 2016-17 19869 2321 1446 346319 369955 Source: Government of India (2017), Economic Survey 2016-17, Vol. II
Table 7 Exchange Rate of Rupee vis-à-vis Selected Currencies of the World Year US dollar Pound sterling Euro Yen 1993-94 31.366 47.206 --- 0.291 2000-01 45.684 67.552 41.483 0.414 2005-06 44.273 79.047 53.912 0.391 2010-11 45.563 70.881 60.232 0.533 2016-17 67.072 87.690 73.609 0.620 Source: Government of India (2017), Economic Survey 2016-17, Vol. II
Demographic Change Growth of population witnessed high increase during the 1951-61 The growth trend continued till 1981 During the first decade of 20 th century growth falls Share of urban population registered a high growth since 1971 Literacy rate increased steadily Substantial increase in quality of life as per demographic indicators The ratio of BPL population registered a fall at a higher rate during the post-liberalisation period
Table 8 Population Growth in India Census Years Population Decadal growth rate 1951 36,10,88,090 13.31 1961 43,92,34,771 21.51 1971 54,81,59,652 24.80 1981 68,33,29,097 24.66 1991 84,64,21,039 23.87 2001 1,02,87,37,436 21.54 2011 1,21,07,26,932 17.69 Source: Government of India, Publication Division (2014), India 2014
Table 9 Rural and Urban population Census year Population (Million) Percentage of total population Rural Urban Rural Urban 1951 299 62 82.70 17.30 1961 360 79 82.00 18.00 1971 439 109 80.10 19.90 1981 524 159 76.70 23.30 1991 629 218 74.30 25.70 2001 743 286 72.20 27.80 2011 834 377 68.85 31.15 Source: Government of India, Publication Division (2014), India 2014
Table 10 Literacy Rate in India : 1951-2011 Census year Persons Males Females Male-Female gap in literacy rate 1951 18.33 21.16 8.86 18.30 1961 28.3 40.4 15.35 25.05 1971 34.45 45.96 21.97 23.98 1981 43.57 56.38 29.76 26.62 1991 52.21 64.13 39.29 24.84 2001 64.83 75.26 53.67 21.59 2011 74.04 82.14 65.46 16.68 Source: Government of India, Publication Division (2014), India 2014
Table 11 Demographic Indicators of India and State of Kerala Demographic indicators Kerala All India Male Life expectancy at birth (2010-14) 72.0 66.4 Female Life expectancy at birth (2010-14) 77.8 69.6 Total Life expectancy at birth (2010-14) 74.9 67.9 Male Life expectancy at birth (2011-15) 72.2 66.9 Female Life expectancy at birth (2011-15) 78.2 70.0 Total Life expectancy at birth (2011-15) 75.2 68.3 Infant Mortality Rates (Per 1000 live births) 2014 12 39 Infant Mortality Rates (Per 1000 live births) 2015 12 37 Birth Rate (per 1000) 2014 14.8 21.0 Death Rate (per 1000) 2014 6.6 6.7 Birth Rate (per 1000) 2015 14.8 20.8 Death Rate (per 1000) 2015 6.6 6.5 Source: Government of India (2017), Economic Survey 2016-17, Vol. II
Table 12 Poverty Line in Kerala and India (Lakdawala Methodology) (Rs. monthly per capita) Year Kerala All India Rural Urban Rural Urban 1973-74 51.68 62.78 49.63 56.76 1977-78 58.88 67.05 56.84 70.33 1983-84 99.35 122.64 89.50 115.65 1987-88 130.61 163.29 115.20 162.16 1993-94 243.84 280.54 205.84 281.35 1999-00 374.79 477.06 327.56 454.11 2004-05 430.12 559.39 356.30 538.60 Source: Planning Commission 2014, Report of the Expert Group to Review the Methodology for Measurement of Poverty
Table 13 Poverty Line in India and Kerala (Rangarajan Methodology) (Rs. monthly per capita) Year Kerala All India Rural Urban Rural Urban 2009-10 803.06 1139.81 801 1198 2011-12 1054.03 1353.68 972 1407 Source: Same as Table 12
Year Table 14 Percentage of Population Below Poverty Line (Lakdawala Methodology) Kerala All India Rural Urban Total Rural Urban Total 1973-74 59.19 62.74 59.79 56.44 49.01 54.88 1977-78 51.48 55.62 52.22 53.07 45.24 51.32 1983 39.03 45.68 40.42 45.65 40.79 44.48 1987-88 29.10 40.33 31.79 39.09 38.20 38.86 1993-94 25.76 24.55 25.43 37.27 32.36 35.97 1999-2000 9.38 20.27 12.72 27.09 23.62 26.10 2004-05 13.20 20.20 15.0 28.30 25.70 27.5 Source: Same as Table 12
Table 15 Percentage of Population Below Poverty Line (Rangarajan Methodology) Year Kerala All India Rural Urban Total Rural Urban Total 2009-10 9.7 23.7 16.0 39.6 35.1 38.2 2011-12 7.3 15.3 11.3 30.9 26.4 29.5 Source: Same as Table 12
Table 16 Number of People below Poverty Line (Lakdawala Methodology) (Lakhs) Year Kerala All India Rural Urban Total Rural Urban Total 1973-74 111.36 24.16 135.52 2612.90 600.46 3213.36 1977-78 102.85 24.37 127.22 2642.47 646.48 3288.95 1983 81.62 25.15 106.77 2519.57 709.40 3228.97 1987-88 61.64 26.84 88.48 2318.79 751.69 3070.49 1993-94 55.95 20.46 76.41 2440.31 763.37 3203.68 1999-20.97 20.07 41.04 1932.43 670.07 2602.50 2000 2004-05 32.43 17.17 49.60 2209.24 807.96 3017.20 Source: Same as Table 12
Table 17 Number of People Below Poverty Line (Rangarajan Methodology) (Lakhs) Year Kerala All India Rural Urban Total Rural Urban Total 2009-10 17.4 35.4 52.7 3259.3 1286.9 4546.2 2011-12 12.3 26.0 38.3 2605.2 1024.7 3629.9 Source: Same as Table 12
Demonetisation in India Implemented on November 8, 2016 Objectives (1). Eradicate black money, (2). Wipe out counterfeits, (3). Root out terror financing, (4). Reduce cash in circulation and spur digital payments. Demonitised all the currency notes of C 500 and C 1000 Nearly 86% of the currency in circulation was demonetised (C 15.44 crore)
Contd. Severe restrictions imposed in exchanging the old currency Severe restrictions in withdrawing money from banks and ATMs New C 2000 notes issued It created acute problems in changing currency Functioning of ATM paralysed for months Restrictions on Co-operative Banks paralysed banking in the sector
Consequences of Demonetisation Introduction of police raj in possession of cash, use of cash and withdrawal of cash It destroyed the entire market transactions using cash Through the destruction of market, the economy was destroyed Destroyed all core activities production employment income of people consumption and demand for goods
Contd Restrictions in exchange of old currency, withdrawal of money from Banks and ATM resulted in unprecedented cash shortage Issue of Rs 2000 notes created acute change of notes to small denominations In an economy using 80% of transactions in cash, acute economic problems were created The worst hit were the informal sector In agriculture the price of commodities fall due to lack of demand
Most of the traditional, cottage and village industries came to stand still Construction sector faced acute crisis and migrant workers returned from Kerala Contd Real Estate and construction sector faced acute recession Tourism was very badly affected The households depending on Gulf remittances faced severe economic problems The revenue from indirect taxes came down
Contd. There was substantial fall in the revenue of State governments Quarterly growth rate indicate a steady decline in post-demonetisation period One percent fall in growth indicate a reduction of GDP worth Rs. 1.5 lakh crores There was substantial fall in private final consumption expenditure (57% of GDP of India) The adverse economic consequences were so large that it could be more than that of the global economic crisis of 2008
Table 18 Economic Growth and Trade Balance Year Growth Rate (%) Exchang e Rate (1$=C) Trade Balance (US $ million) Exports US $ million (%) Imports US $ million (%) 2010-11 8.9 45.577-118633 40.5 28.2 2011-12 6.7 47.923-183356 21.8 32.3 2012-13 5.4 54.410-190336 -1.8 0.3 2013-14 6.1 60.502-135794 4.7-8.3 2014-15 7.2 61.144-137695 -1.3-0.5 2015-16 7.9 65.468-118717 -15.5-15.0 2016-17 (PE) 6.6 67.072-108039 5.3 0.9 Source: Government of India (2017), Economic Survey 2016-17, Vol. II
Table 19 Quarterly Estimation of Growth Rate (GVA, at 2011-12 prices) SL. No. Category 2015-16 Q4 (Jan- Mar) Q1 (Apr- Jun) 2016-17 Q2 (Jul- Sep) Q3 (Oct- Dec) Q4 (Jan- Mar) 1. Agriculture, forestry & fishing 1.5 2.5 4.1 6.9 5.2 2. mining and quarrying 10.5-0.9-1.3 1.9 6.4 3. Manufacturing 12.7 10.7 7.7 8.2 5.3 4. electricity, gas and water supply 7.6 10.3 5.1 7.4 6.1 5. construction 6.0 3.1 4.3 3.4-3.7 6. Trade, hotels, transport & 12.8 8.9 7.7 8.3 6.5 communication 7. Financing, insurance, real estate 9.0 9.4 7.0 3.3 2.2 8. Public Administration, defence 6.7 8.6 9.5 10.3 17.0 and other services GVA at Basic Price 8.7 7.6 6.8 6.7 5.6 Source: Central Statistical Office, Quarterly Estimates of GDP for 4th Quarter, 2016-17 and First Quarter 2017-18.
Sl. No. Table 20 Quarterly and Half Yearly Estimate of Gross Value Added (at 2011-12 prices) Category 2017-18 Half yearly Q1 (Apr-Jun) Q2 (Jul-Sep) 2016-17 (Apr-Sep) 2017-18 (Apr-Sep) 1 Agriculture, forestry & fishing 2.3 1.7 3.2 2.0 2 mining and quarrying -0.7 5.5-1.1 2.0 3 Manufacturing 1.2 7.0 9.2 4.0 4 electricity, gas and water supply 7.0 7.6 7.6 7.3 5 construction 2.0 2.6 3.7 2.3 6 Trade, hotels, transport & 11.1 9.9 8.3 10.5 communication 7 Financing, insurance, real estate 6.4 5.7 8.1 6.1 8 Public Administration, defence 9.5 6.0 9.1 7.6 and other services GVA at Basic Price 5.6 6.1 7.2 5.8 Source: Central Statistical Office, Quarterly Estimates of GDP for 1 st and 2 nd quarter, 2017-18
Table 21 Private Final Consumption Expenditure (Expenditure of GDP) Year/Quarter Current Prices (C Crore) Growth (%) 1. 2016-17 Q1 (Apr-Jun) 2,042,054 - Q2 (Jul-Sep) 2,106,743 3.17 Q3 (Oct-Dec) 2,341,797 11.16 Q4 (Jan-Mar) 2,436,415 4.04 2. 2017-18 Q1 (Apr-Jun) 2,226,885-8.60 Q2 (Jul-Sep) 2,304,645 3.49 Source: Central Statistical Office, Quarterly Estimates of GDP for 4th Quarter, 2016-17 and First Quarter 2017-18.
References B. A. Prakash (ed), 2012, Indian Economy Since 1991: Economic Reforms and Performance, Pearson, New Delhi Government of India, Economic Survey 2016-17, Vol I & II, Oxford University Press, New Delhi Central Statistical Office (2017) Quarterly Estimates of GDP for the fourth Quarter of 2016-17 and second quarter of 2017-18 www.keralaeconomy.com
Thank You